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The Progressive Corporation (PGR) is an American auto insurance company that operates in every state and the District of Columbia. Most auto insurance companies offer different kinds of insurance such as home and life, but Progressive concentrates on only auto, allowing the company to more accurately assess the riskiness of their clients and pass on low prices to its clients.

Progressive’s primary business strategy is to attract and maintain customers through low premiums and rapid and innovative claims processing. As a result of their focus on autos only, Progressive leads its competitors with some of the highest returns on premiums. However, client credit scores are an essential part of Progressive's scoring formula, and consumer advocacy groups have been lobbying for regulation to disallow their use.

In addition to revenue from premiums, Progressive, like all auto insurance companies, also makes money by investing the premiums it has collected before they get paid out (called the float). The auto insurance industry typically sees lower income from float because auto claims are filed much more frequently compared to home or life claims and thus have less time to generate investment returns. Since Progressive deals with only auto insurance, its float income is considerably less than its competition.

As of December 31, 2009, Progressive had 53 subsidiaries and one mutual insurance company affiliate.[1] These insurance subsidiaries and affiliate provide personal and commercial automobile insurance and other specialty property-casualty insurance and related services. Its property-casualty insurance products protect its customers against losses due to collision and physical damage to their motor vehicles and uninsured and underinsured bodily injury, and liability to others for personal injury or property damage arising out of the use of those vehicles. Its non-insurance subsidiaries support its insurance and investment operations. The Company operates its businesses throughout the United States. In December 2009, it began selling personal auto insurance in Australia.[1]

The Company offers a range of personal and commercial property-casualty insurance products primarily related to motor vehicles. Its Personal Lines products consist of insurance for personal autos and special lines products, which includes motorcycles, all terrain vehicles (ATVs), recreational vehicles (RVs), mobile homes, watercraft, snowmobiles and similar items. It writes personal auto insurance in all 50 of the United States and in the District of Columbia. The Company’s Commercial Auto products are offered in 49 states. It does not write Commercial Auto in Hawaii or the District of Columbia. Its Claims business area supports both the Personal Lines and Commercial Auto businesses.[1]

Revenue Streams

Auto insurance companies make revenue primarily in two ways: premiums and float.

Premiums: Progressive’s main source of revenue is from premiums, which are regular fees paid by its clients in exchange for a promise to reimburse expenses incurred due driving accidents.

Float: In the time between receiving premium payment and paying out claims and expenses, auto insurance premiums are said to float, and companies will invest the float in stocks, bonds and other investments to earn additional revenue. Because earnings from float are tied to its investment portfolio, rising and falling interest rates can determine its profitability.

Costs

The key profit indicator for an insurance company is the “combined ratio,” which measures the ratio of claims and expense costs to income. A combined ratio under 100% indicates profitability and the lower the rate, the higher margin a company generates. In 2009, Progressive's combined ratio was 94.6%, one of the lowest in the auto insurance industry.[2]

Claims: Like most insurance companies, Progressive’s largest cost are its claims payments. The percent of premium money that goes to paying claims is called the loss ratio. Progressive’s loss ratio in 2009 was 73.5%, meaning that of the amount earned in premiums, Progressive paid out 73.5% of it to clients who filed claims for accidents.[2]

Customer Channels

Progressive has three channels for generating sales: phone, Internet, and independent agents, who make up the largest share--about two-thirds--of all premiums sold. Progressive pays a relatively low commission of 10% to agents and maintains high agent activity volume because it has advanced, easy to use underwriting technology. This allows Progressive and its agents to assess risk more accurately than its competitors, and therefore offer a lower price to consumers. Recently, Progressive has been trying to move towards direct sales by aggressively marketing its online insurance service. Direct channels constitute a larger source of customers for Progressive than for other insurers.

Progressive Mentality

As a company, progressive has a distinct corporate mentality that manifests itself in the way it does business and treats its customers, employees, and shareholders.

Profit Sharing: Progressive pays its employees a yearly bonus tied to company profits. If Progressive fails to meet its yearly goals, no one earns a bonus.

Stock Dividends: Dividend payments are tied to bonus payouts. Thus shareholders and employees alike will be compensated in good times and penalized in bad times.

Financial reporting: The company issues financial reports on a monthly rather than quarterly basis, leading to greater visibility into its operations and performance.

Underwriting Technology

Progressive’s business goal is to grow as fast as possible at a 96% combined ratio. Progressive uses sophisticated computer pricing models to determine the risk that any driver gets in an accident. Using this technology, their goal is to offer the “right price,” which means the premium is equal to Progressive's expected cost of the policy, plus a profit mark-up. This approach promises steady growth but not dramatic profits, since it does not allow Progressive to take advantage of conditions that would lead to high profits, such as significant market power. Moreover the underwriting advances allowed Progressive to target high-risk, high-value drivers who bring with them a high profit margin. In 2009, Progessive has a net margin of 7.6%.[2]

In the long run, maintaining customers through this pricing strategy may prove a successful strategy. Progressive's technology enables its website design, which shows customers the price Progressive charges and the price of competitors. This transparency enhances Progressive's image as a fair company and improves customer retention.

Progressive uses customer credit history as a central part of their pricing formula and consistently ranks first or second in the industry by loss ratio, indicating the effectiveness of its underwriting. Like other insurance companies that use credit as part of their formula, Progressive is vulnerable to regulatory changes regarding the use of credit scores in its underwriting. Recently, consumer advocacy groups have begun pressuring state governments to disallow credit scores in underwriting.

Autos Only

Because of its commitment to underwriting advantage, Progressive maintains an “autos-only” policy--they do not provide any other form of insurance. Many other insurance companies underwrite housing, medical and other insurance in addition to auto. Although Progressive may not be leveraging “bundling” opportunities by selling multiple products to the same customer, the autos-only policy is essential to other aspects of the business strategy, especially concentration.

Regional Concentration

Progressive aims to achieve high concentrations of customers in the same areas. This approach has three main effects. Concentration helps underwriting accuracy by letting Progressive better assess driving habits and risks for a particular area. It also maximizes the impact of advertising because billboards and TV campaigns can be concentrated in a handful of cities. Finally, concentration facilitates rapid claims processing because claims agents can be concentrated in small areas and more rapidly respond to calls.

Customer Service

Progressive tries to distinguish itself from the competition by rapid claims processing. After a client files claims online or over the phone, Progressive sends a claim adjustor to make a home call. Progressive also hopes to build on its claims processing with its new Concierge Service program. Rather than having an agent drive out to handle every claim, clients bring their cars to a processing center, where Progressive inspects the car, ships it out to be repaired if necessary, and provides the client with a rental car. The program aims to reduce employee and claims cost while improving client satisfaction. Concierge service has yet to become popular, however.

Business Segments

The Personal Lines business is either generated by independent agents and brokers or written directly online or by phone. The Agency business includes business written by its network of more than 30,000 independent insurance agencies located throughout the United States, as well as brokerages in New York and California.[1]

The Agency business also writes through alliance business relationships with other insurance companies, financial institutions and national agencies. In 2009, the total net premiums written through the Agency business represented 59% of its Personal Lines volume. The Direct business includes business written directly by the Company online and over the phone.[1] Net premiums written in the Direct business were 41% of its Personal Lines. The Company’s Progressive Home Advantage combines a Progressive auto policy with a homeowner’s or renter’s policy, underwritten by one of three unaffiliated insurance carriers, is available to Agency customers in 41 states and to Direct customers in 48 states and the District of Columbia; this program is not available to Direct customers in Florida and Alaska. It also offers a personal umbrella insurance product in 30 states through certain independent agents and to Direct business customers via telephone.[1]

The Commercial Auto business writes primary liability and physical damage insurance for automobiles and trucks owned by small businesses and represented approximately 11% of its total net premiums written for 2009.[1] The majority of its Commercial Auto customers insure three or fewer vehicles. The Commercial Auto business, which is primarily distributed through the independent agency channel, operates in the business auto and specialty truck markets.[1]

Other Indemnity Businesses

The Company’s other indemnity businesses include writing professional liability insurance for community banks, principally directors and officers liability insurance. In addition, its other indemnity businesses include managing its run-off businesses.[1]

Service Businesses

The Company’s service businesses provide insurance-related services. It also provides policy issuance and claims adjusting services for the Commercial Auto Insurance Procedures/Plans (CAIP).[1] Through Progressive Home Advantage, it acts as an agent to offer new and existing Progressive customers home, condo and renters insurance underwritten by these homeowner’s insurance companies.[1]

Competition

Progressive's main competitors are the other industry leaders, GEICO, State Farm, and Allstate (ALL). All of these competitors also sell non-auto forms of insurance putting them at greater risk to catastrophes. For example, Hurricane Katrina devastated them because they insured Gulf Coast homes. But because of Progressive's unique autos-only policy, neither of these risks poses as significant a threat (people can drive their cars away from a hurricane). Progressive (and GEICO) have been attempting to cut into Allstate and State Farm's combined market share of 29% by competing on price.

As Progressive continues to grow, it may face pressure to offer low premiums. If Progressive begins to charge below its targeted price levels, it will lose its actuarial advantage, and its loss ratio could rise. In general, insurance industries follow cycles where high premiums and tight actuarial standards cause high profits, which insurers invest in growing their customer base; this causes an erosion of discipline, and falling profits. Insurers then raise their prices, and the process begins again. This is known as the underwriting cycle.

The underwriting cycle affects all insurers. Likewise, auto insurers have benefited from another trend: low accident rates. In 2003, Progressive's return on premiums more than doubled from 7.6% to 12.7%, and it has remained high since. These high profits arose because its formula over-predicted the rate of accidents. This could be due to a number of factors such as the introduction of safer cars or roads, factors which are difficult to predict. It could also be that auto insurers have been lucky of late, and by chance there have been fewer accidents than expected. If luck is the explanation, then the industry’s high profits may fall as more accidents occur. In any event, the high profits are likely to attract increased competition in the auto insurance industry, further compounding the effects of the underwriting cycle.

Comparative Metrics

Since the ratios and investment returns figures are not disaggregated, the following table compares Progressive to other leading insurers on these key statistics. Note that premiums sold refers to total premiums sold, not just auto premiums. Figures in billions of dollars unless noted.

$Billions

'

State Farm**

Allstate

Progressive (PGR)

Liberty Mutual**

Premiums Sold

$31.94B

$29.09

$13.77

5.59

Claims Paid

$19.07

$27.23

$11.74

$4.12

Combined Ratio

95%

90%

93%

91%

Investment Income

$3.10

$6.43

$0.68

$0.54

Net Income

$4.79

$4.63

$1.18

$0.40

Source: Company Data

Progessive's low combined ratio indicates a high degree of profitability, but closer examination reveals a low investment return, even allowing for the fact that it sells fewer premiums. The low return is due to Progressive's autos-only stance: since auto claims are filed more frequently than home insurance claims, investments have less time to generate float returns. Progressive aimed for a combined ratio of 96% but ended up exceeding expectations by 8 percentage points due in large part to the trend in lower accident rates.